Most of us understand the difference between an assets and a liability. For many though, when you start bringing in income, expenses, owners equity, retained earnings, dividends - well it's enough to make your head spin! Here's a basic Accounting 101 to help you sort out "all of that other stuff".
Assets are things you have: Cash, checking accounts, property, inventory, etc.
Liabilities are money you owe: Credit cards, bank loans, sales tax payable.
The difference is your equity. In fact, that is the definition of equity - the difference between your assets and liabilities. This equity category holds all those things listed above that can be confusing.
So let's look at an example we all know well: your house. The house is your asset. Let's say it's worth $100,000. Your mortgage is your liability, and let's say you still owe $40,000. So your equity is $60,000.
As any good homeowner, you'd like to increase your equity. So how did you do that? Pay more on your mortgage. But what must you really do, in order to pay more on your mortgage? Make MONEY! If your household expenses exceed your income, you probably won't make any headway on your mortgage. Well it's the same for your business. You get more equity - or "Owner's Equity", as it's called in business - when you make a PROFIT! This Owner's Equity account tracks all of the Profit (or Loss) your company makes, as well as how much you personally withdraw or contribute to the company.
When you make a sale (income) or buy something for your business (expense) your profit will change accordingly. Many people confuse assets with income, and liabilities with expenses. This is because many times when we receive income, our assets will increase as well. And often when our expenses increase, our liabilities increase too. This is merely a function of double-entry accounting at work, which says that every transaction must affect at least two accounts equally. For example, if you purchase office supplies and pay with a credit card, your credit card balance (liability) increases, as does your office supply expense category. This is why it is easy to get certain accounts confused. Here's a re-cap:
Our number one goal is the financial peace-of-mind of our clients. We eliminate the stress of constant bookkeeping, help you to understand what the numbers mean, and give you the financial knowledge to make you business more profitable.
